Prices Rise as Demand Soars: Base Metals Such as Copper and Steel Are Fetching Some of the Highest Prices in Recent History as Demand Outstrips Supply and Inventories Run Low. the Conditions Are Right for a Wave of New Mining Investments across Mineral-Rich Africa. Moin Siddiqi Reports
Siddiqi, Moin, African Business
Industrial metal prices have been surging ever higher, in the wake of growing demand from the US, China, India, Japan and the eurozone. Supply tightness and critically low levels of inventories are also helping to firm prices upwards.
In fact, since 2003, industrial metal prices have risen relentlessly setting new records in 2006. To date, aluminium has hit $2,675 per tonne (t); copper $5,105/t; lead $1,437/t; nickel $17,910/t; tin $7,930/t; and zinc $2,420/t.
Tony Trahar, chief executive of Anglo-American, says: "The outlook for the global economy is encouraging, with leading indicators showing signs of continuing global growth and strong underlying demand for our products."
Some fear that industrial production will face a shortage of raw materials over the next couple of years. The mining industry, they claim, will struggle to respond to anticipated short-term demand after nearly two decades of under-investment.
Most commodity watchers revised projections upwards in the first-quarter of 2006. Morgan Stanley, the US investment bank, said: "We have significantly increased our short-term and long-term commodity price forecasts to reflect our expectations of sustained tight markets and ongoing deficits in 2006."
But rocketing prices makes certain metals vulnerable to substitution. For example, while presenting his company's record profits last February, Chip Goodyear, CEO of BHP Billiton, commented that high copper prices could push the construction industry into substituting plastic piping for copper piping. A similar argument might be made for carbon-fibre composites replacing some industrial metals.
BHP Billiton was not alone among the mining companies in posting record profits last year. Fellow resource giants AngloAmerican and Rio Tinto, among others, have also seen record profits. The Metals Economics Group estimates miners last year spent $5.1bn on exploration and development, up a whopping 168% from a 12-year low of $1.9bn spent in 2002. None of the world's large mining companies envisages any sort of slowdown in the demand for industrial metals.
Yet this bull market presents mining companies with something of a dilemma: should they hedge their production with derivative contracts--whereby they are locked into selling their production at futures prices, or not?
Robin Bahr, the metals specialist at UBS, explains: "Rapid price increases have put the management of mining companies in a difficult position: if they enter a long-term selling programme and the prices go up, investors will be upset because they have missed out on the upside, and if prices fall, investors will ask 'why didn't they lock in at the higher price?'"
Are base metals overbought?
It is very difficult to forecast with any certainty if the current economic cycle has now peaked and metals price will stop rising at such a frenetic pace. As UBS says: "We are now in a new ballgame--a new paradigm. You just have to go with the flow now ... the thing is no one knows if we are in the beginning, middle or the end of this ... there are no upside levels, it is just clear blue sky."
However, investment bank HSBC believes: "There is little doubt that prices have moved ahead of underlying fundamentals of supply and demand, with the divergence generally attributed to the inflows of 'cold' [i.e. speculative] money into the sector."
Meanwhile, Citigroup, the US banking giant, says: "This trend [in metals prices] is a bubble, it could go higher before it bursts and prices are likely to be supported through the first half of 2006."
Wall Street bank Goldman Sachs also warns: "Although risks to long-dated prices remain skewed to the upside, a demand slowdown driven by either weaker economic activity or price-related demand destruction remains a significant risk to front-end prices."
On current trends, 2006's average prices for aluminium could be $2,500/t; copper $5,000/t; lead $1,300/t; nickel $15,100/t; tin $7,500/t; and zinc $2,100/t. …